Republic Financial Holdings Limited, a financial institution in the Caribbean, considers credit risk management as vital to the long-term success of a company. They consider risk as the possibility that the borrower will default on its obligations under the agreed terms. Therefore, the objective of risk management is to maximize the risk-adjusted rate of return by maintaining the level of credit risk within acceptable parameters. The following are the strategies and techniques that they use to manage risks.
Hierarchy of discretionary officer
The credit risk management process of the company is based on a hierarchy of discretionary officers. Its risk management function operates separately from the business development aspect of its operations. A board credit committee, headed by the chairman of the board and composed of executive and non-executive directors, has the power to exercise board powers over all decisions in risk management. The risk management team is responsible for management and supervision of the company’s credit portfolio, ensuring that loans are granted in accordance with applicable laws, good banking practices and applicable general policy issued by the association; it is determined by the board of directors.
Risk evaluation
The risk rating system sorts commercial/corporate accounts into different risk categories to facilitate the evaluation of individual accounts and portfolios. The retail side of the business uses a computerized credit scoring system with predefined risk management criteria in place at all branches to aid decision in loan process. Trend indicators are used to assess whether the risk is improving, static, or worsening. Assessing risks and trends informs credit decisions and determines the intensity of the monitoring process.
Early detection and action
The credit control process can early-detect and implement remedial actions. Accounts with unpaid collections that appear to be suspicious or unduly delayed will be moved from performing to non-performing. Provisions for loan losses are created to cover any possible loss on receivables. Non-performing accounts are reviewed annually and dealt accordingly with the established guidelines.
Reducing levels of exposure to risk
Risk can be reduced by placing limits on the amount of risk the company can accept from borrowers that have similar businesses operating in the same geographic area or in any similar circumstances that may affect their ability to meet their contractual obligations. These risk levels are regularly controlled and frequently monitored by the Board of Directors.
Reference: Republic Financial Holdings Ltd.